Ending XLB

We are nearly out of XLB. The trade has gone very well, we are up $458 and now only short 2 May 46 puts. These 2 put contracts can be closed for about 20 cents, so we could potentially make another $40 or so, if we let them expire in 21 days. The risk reward is not in our favor now as the maximum we can make is $40 while our maximum loss is many times that. If, over the next 3 weeks, XLB drops to 43, we will see our short puts lose $300 for each contract, or $600. We don’t like those numbers.

If you have the potential to lose $600 or more, you must have enough compensation to make that risk worth holding. So, we will close the remainder of the position by buying the open contracts. XLB remains very high in relative strength, and is at the number 3 position today. There is no problem with this sector, but it won’t go up every day.

The plan will be to sell new XLB put contracts on days when the price is down, as long as it returns to the number 1 or number 2 position. If it drops below that, we will stay out. This has been a great example of how you should think about opening a position, why you should open that position, how you should manage it, and when you should go ahead and close it. The Materials sector is strong, and will probably continue to trend higher.

The past few days, the market has been mostly up — 5 or 6 days in a row. This is the time to be selling calls on your open positions. More on all that later. Now is not the time to enter large new positions, unless we get some down days. Patience produces profits, so take your time and sell new puts on down days.

Our WalMart trade is continuing to work and is beginning to build profits. The total since inception is about $145 now. We will add to this position on down days.